Tuesday, February 21, 2006

Livin' La Vida Loca....

I came across a few charts on one of my favorite sites, link . Recently, our new Chairman of the Federal Reserve and the White House have glossed over the fact that for the first time since the Great Depression, our nation has a negative savings rate. Several 'experts' have also parroted this view that the savings rate although negative does not account for huge wealth in assets such as stocks and Real Estate. I beg to differ with that conclusion.

Looking at our nations' debt load, in the past 5 years alone we have skyrocket from having our percentage of household debt/GDP go from 70% to 90%. But , it gets worse. This chart left off in 2004. Add on another few trillion in loans and we are now approaching 100% debt/GDP.

Isn't it a coincidence Congress just passed major bankruptcy legislation when we as a nation are essentially 'bankrupt" by definition?

Who made all of this easy borrowing possible? Why the Federal Reserve, of course. If you remember after the stock market crash, the Fed panicked and began to lower rates. After 9/11 they lowered rates to 1% and kept them there. The Fed printed up money like it was candy. Look at this chart showing the explosion in M3. I remember learning somewhere about monetary inflation? Also of note is that as of March 2006, the Fed is going to stop reporting M3. I wonder why?

Maybe this gives you a reason as to why we as a nation are bankrupt. We simply borrowed and borrowed and borrowed. Why not? The Fed printed up all of this money. It was there for the taking at 1%. Who needed a down payment or proof of income? We peaked at almost one trillion dollars worth in 2004. The Fed opened up the floodgates, people borrowed and lenders rejoiced.

And how much of this cumulative trillions did we manage to save?

This chart shows that for the first time in 40 years, the percentage of Home Mortgage Debt is greater than the owners equity..... Hmmmm. I thought I was taught that equity minus debt equal net worth....But if the debt is greater than the equity? You guessed it, a nation "upside down".

Seems to me like this 'easy money" was spent.

As I have said, Real Estate is no different than any other financial asset. Just like a stock, bond, mutual fund, commodity, or piece of art, the "value" is what the market will pay. People have used their homes as an investment, not a residence. They have replaced stocks as a means for getting rich 'quick' with real estate 'investing', reducing their homes to nothing more than a commodity to be traded. However, just like the Dot.coms of the 1990's, the value in homes will come crashing down and these people will be for the worse. We haven't saved a darn penny as a nation, we bought SUV's and boats and plasma TV's. We sucked all the equity out of our homes and then some. The party is over and the day after hangover is upon us.


At 10:37 PM, Blogger David said...

Great post. :-)

Bubble Meter

At 11:54 AM, Blogger sobemark said...

check out the miami inventory


can you say " Oh My !"
people running for the exits!

At 12:06 PM, Anonymous Anonymous said...

You obviously do not believe in America, this is the land of opportunity.

The correct question to ask it:

"Now that the RE game is done, what is the next game in town for me to make a killing from?"

Sorry if you missed out on both the stock and RE booms, I'm retired twice over at the age of 37 due to these booms. Thanks to Greenspan.

At 9:45 PM, Blogger lemmings watcher said...

It's unbelievable how many people think that property will continue to appreciate for next twenty years at the rate it has in the last five years! How's the market in Ft. Lauderdale? I live in LA and the correction is starting to be quite apparent. I wonder how far prices will drop and for how long? Ideas?

At 9:48 AM, Anonymous Anonymous said...

Net Worth = Equity;
Total Value = Debt + Equity;
So we're not upside down, just more levered.


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